Gold Price Likely to Push Inflation up?

The market has been witnessing sky high gold prices in recent days. Gold price reached its peak on 9 August when it hit VND46.2 million/tael. In the face of such high increases, the State Bank of Vietnam (SBV) permitted importing gold in order to stabilise the market. This is regarded as a measure to control the intense heat in the domestic gold market and to avoid adverse impacts on macro-economic stability, especially in such a sensitive context as now.

 

SBV’s decision to import gold is believed to be timely. Mr Do Minh Phu, General Director of DOJI Group and Chairman of Vietnam Gold Traders Association, thinks SBV made the right decision on gold import when gold prices underwent huge changes.

 

Although gold is not included in the goods basket for calculation of CPI, it is one item exerting strong influence on this index. According to economic experts, gold price not only casts impact on CPI, its fluctuations strongly affect the USD/VND exchange rate. The increase in gold price pushes the exchange rate between USD and VND, which will create a big challenge for the macro-economy. Gold price is related to a series of state policies promulgated for important economic sectors including import, export and investment. The possibility exists that unless state administrative agencies take measures to tighten gold prices and USD/VND exchange rate, it will make controlling inflation more and more difficult in the year-end months.

 

Besides, many believe that the SBV’s permission to import gold is simply a temporary solution, not an ultimate treatment to gold price increases. Gold import can possibly bring about side effects, such as higher demand for foreign currency, which thereby enlarges the trade deficit. It is obvious that the State will have to balance the relationship between gold import quota and domestic supply and demand. If this relationship is not well balanced, pressure will be exerted on the exchange rate and inflation will accordingly go up and be harder to control.